British regulator seeks to protect mining's minority shareholdersPublished by MAC on 2013-11-07
Source: Statement, Reuters
Tinkering at the edges
How the new Financial Conduct Authority is not living up to its own rhetoric of fixing what’s going wrong.
London Mining Network blog post
6 November 2013
New rules announced by the Financial Conduct Authority (FCA) to strengthen minority shareholders' powers to hold companies to account are well intentioned but do not go far enough. They will not change the power dynamic within mining companies which enables them to ride roughshod over governance issues and therefore also over the lives of those directly affected by the destruction that these companies' operations bring.
One year on from the publication of the last consultation paper on the rules for listing on the London Stock Exchange, and nearly a year on from the establishment of the new FCA, mining companies such as Bumi plc and ENRC continue to wreak havoc both in the financial markets of London and on the ground with their mining operations.
Yesterday, on the announcement of these new listing rules, David Lawton, the FCA's director of markets, maintained that "active engagement by shareholders is essential to make markets work well."
London Mining Network (LMN) and its member groups have raised concerns at Bumi plc's shareholder meetings. However, the company continues to operate with impunity on the London Stock Exchange (LSE), despite allegations of massive fraud, court cases, investigations by the Serious Fraud Office and share suspension.
Andrew Hickman from LMN group Down to Earth said: "Bumi's creation in 2010 is now considered to be illegitimate, lacking due diligence by the company, its founding shareholders, its lawyers, financiers and regulators. Since then, corruption, mismanagement and social and environmental destruction have been revealed to be rife in the companies' operations. When will the UK's financial regulator not just tinker at the edges, but get a grip on this situation and act to stop this abuse?"
Similarly, notorious UK-listed mining company Vedanta's majority shareholder Anil Agarwal has had a "relationship agreement", such as that proposed by the FCA, in place with the company he controls since 2005, making a mockery not only of the FCA's intention but also the UK Corporate Governance Code of 2010. Vedanta openly admits that it has violated the Code.*
The LMN has been working for root and branch change to the way mining companies operate on the London Stock Exchange. In May 2012 it supported an amendment to the Financial Service Bill proposing that human rights, social and environmental considerations be taken into account when listing companies on the LSE, in line with Hong Kong Stock Exchange requirements. Last month, LMN accompanied community and civil society representatives from Indonesia and Colombia to meet with members of the Parliamentary Select Committee for Business, Innovation and Skills, currently conducting an enquiry into Extractive Industries. Hendrik Siregar from the Indonesian Mining Advocacy Network (JATAM) and Jazmin Romero Epiayu from the Colombian indigenous organization, Fuerza de Mujeres Wayuu, both called upon UK listed mining companies to stop causing human rights abuses, and social and environmental destruction in their countries.
The two civil society representatives were in the UK to attend last month's AGM of BHP Billiton, a company whose coal mining projects are bringing severe negative impacts for communities in both Indonesia and Colombia. Their concerns were conveyed to the BHP Billiton board at the AGM, as was a call for 'active engagement' on the issue of climate change through the candidacy of former coal company executive turned climate campaigner Ian Dunlop to the board. BHP Billiton's leadership rejected Ian Dunlop's independent candidacy, stating that his climate change platform was a 'single issue argument'.
On his appointment as the new head of the FCA, Martin Wheatley said that the financial authorities needed to "not just tick boxes" but to "look at what's going wrong and take action." If the FCA is to act to ensure that the public and shareholders have an independent voice and effective oversight, it will need to seek powers to ensure more radical change is possible.
Richard Solly, Co-ordinator of London Mining Network said: "The FCA's additional red-tape measures announced yesterday are toothless against UK-listed mining companies' unwillingness to have independent voices on their boards or submit themselves to oversight by civil society, including the communities affected by their operations. BHP Billiton's current rejection of Ian Dunlop is a prime example of a leading mining company closing ranks and just paying lip service to democracy and good governance. The FCA is in danger of becoming as toothless as its predecessor."
* See page 78 of Vedanta's 2012-13 Annual Report
British regulator to toughen London share listing rules
6 November 2013
LONDON (Reuters) - Britain's financial regulator is to bolster its stock market listing rules to better protect minority shareholders, after high-profile scandals at mining companies ENRC and Bumi left some investors nursing heavy losses.
The Financial Conduct Authority (FCA) said on Tuesday new measures to be introduced next year would include a requirement for companies in which one shareholder owns more than 30 percent to have a "relationship agreement" in place to ensure they can operate independently from that shareholder.
Investigations into alleged irregularities at Kazakh mining group ENRC, which listed on the London Stock Exchange (LSE) in 2007, and Indonesia-focused Bumi, listed in 2011, have put a spotlight on listing rules and the damage done to the interests of minority shareholders.
Both were hit by shareholder battles that have battered their shares, raising questions about how they came to market.
The companies, at least initially, had significant shareholders - ENRC was controlled by its trio of founding shareholders and the Kazakh government, while Bumi was effectively controlled by its co-founders the Bakrie family.
ENRC is now set to delist from London after a buyout by the founders and the Kazakh government.
Many companies with majority shareholders already have relationship agreements, but shareholders had often complained that they are either ignored or ineffective.
Bumi, for example, did have a relationship agreement with the Bakrie family, but that deal allowed the family to nominate the chairman, chief executive and chief financial officer.
The FCA said it would set minimum requirements for relationship agreements, which would for example ensure that minority shareholders could have the ability to veto transactions between a business and its main owner.
"That provides the minority shareholders with some teeth to be able to discipline the controlling shareholder where they breach the relationship," said David Lawton, director of markets at the FCA, which can publicly censure or fine a company which breaks the listing rules.
The Association of British Insurers (ABI), whose members manage nearly $3 trillion of assets, is among those who have called for more protection for minority investors.
"These are all good steps in the right direction, although we would like to see some of this go a little further," said Robert Hingley, director of investment at the ABI, which had suggested the FCA needed the power to punish the controlling shareholder rather than the company.
The rules, first proposed by FCA predecessor the Financial Services Authority, will apply to companies with a "premium" listing, who already face higher requirements on regulation and corporate governance than those with a standard listing.
Some warned the tougher controls could risk driving businesses away. "It remains to be seen whether, by singling out one type of company ownership for extra rules, the FCA will discourage these companies from listing in London," said Roger Barker, Director of Corporate Governance and Professional Standards at business group the Institute of Directors.
Under the changes, minority shareholders will also have greater power over the election of independent directors, who will have to be approved by both the shareholders as a whole and the minority group.
The FCA stopped short of increasing the minimum "free float", the proportion of a company's shares which must be freely available to trade, from its current level of 25 percent to the as much as 70 percent requested by some investors.
It said this seemed too blunt a tool, and that it needed to balance protections with unnecessarily increasing the regulatory burden on companies that are already well governed.
Shares subject to a lock-up of more than 180 days will not count towards the free float level, however, the regulator said, and it is also further consulting on criteria it should take into account when considering waivers in individual cases.
There are around 50 premium-listed companies on the LSE which have a controlling shareholder. Those who do not already meet the new rules will have six months from the mid-2014 implementation date to ensure they comply.